Breaking News
Investing Pro 0
NEW! Get Actionable Insights with InvestingPro+ Try 7 Days Free

As inflation breaks records, $100 oil is also looming

EconomyJan 20, 2022 02:08
Saved. See Saved Items.
This article has already been saved in your Saved Items
© Reuters. FILE PHOTO: A GOI company truck is seen next to fuel pumps at a Cepsa petrol station in Cuevas del Becerro, Spain, November 29, 2021. REUTERS/Jon Nazca/File Photo

By Dhara Ranasinghe

LONDON (Reuters) -Already less transitory than forecast, central bankers' inflation headache may be about to become more acute as they face the prospect of $100-plus oil that lifts consumers' price expectations and intensifies simmering wage hike pressures.

Brent crude futures, which soared 50% in 2021, are up a further 14% already in 2022 at seven-year highs of $89 a barrel. With production capacity tight, inventories low and geopolitics racking several producing regions, oil is hurtling towards $100, a level Goldman Sachs (NYSE:GS) predicts will be breached by mid-year.

JPMorgan (NYSE:JPM) predicts oil could reach $125 a barrel this year and $150 in 2023.

It is possible the net impact of a $12 price rise from here would not be massive, as headline inflation rates already reflect jumps in energy prices from a year ago. Economies, especially in the West, are meanwhile far less energy intensive than even a decade ago.

Rate hikes in countries including Britain and Norway, and hints from central banks such as the U.S. Federal Reserve, which may signal next week how fast it plans to tighten policy, have checked inflation expectations from tracking oil prices higher.

But policymakers had reckoned on base effects kicking in as the 2021 oil surge abated, tempering year-on-year inflation.

Many also argue the psychological impact of $100 oil cannot be understated, especially as consumers, businesses and politicians fret over inflation at multi-decade or record highs; the latest U.S. consumer price reading was 7%, a 40 year-peak.

Wednesday's data showing British consumer inflation at 30-year highs underscores how the energy effect is cascading into food and hospitality prices.

"It could be the cherry on the inflation cake if we don't get a moderation in energy prices," said Frederik Ducrozet, a strategist at Pictet Wealth Management.

"This time it's a bit different because we're already at a point where the risks are tilted up and central banks are worried about a wage-price spiral since energy prices contribute to second-round effects."

Citi's inflation surprise indexes have hit record or multi-year peaks in Europe and elsewhere, indicating readings have come in higher than expected.


If oil does hit $100 and stays there, it will throw into disarray policymakers' calculations -- European Central Bank projections for example assume Brent at $77.5 in 2022, declining to $69.4 by 2024.

Crucially, it could also induce businesses to pass costs to consumers, or workers to demand higher wages. These so-called second-round effects can cause a broader inflationary spiral that pressures central banks to act.

The effects differ from country to country but in the euro area, a 10% rise in oil adds roughly 0.5% to inflation, though direct effects tend to fade quickly.

For the United States, a paper published in November on the CESifo research network by two Dallas Fed researchers estimated that a $100 oil scenario would raise the year-over-year PCE inflation gauge by 1.8 percentage points (pp) at the end of 2021, and 0.4 pp by end-2022.

The core personal consumption expenditures index, the Fed's preferred inflation measure, would rise by 0.4 pp and 0.3 pp in 2021 and 2022, respectively. That would see one-year household inflation expectations rise 1.2 pp but add just 0.2 pp to five-year expectations, the study said.

For some, the second round effects are here already, with the U.S. economy near maximum employment and average hourly wages jumping a solid 0.6% in December. Britain, where job creation has hit records, is mulling minimum wage increases to ease the fuel bills pain.

Wage pressures are yet to surface in the euro zone. But given surging energy bills, Societe Generale (PA:SOGN) senior inflation strategist Jorge Garayo reckons $100 oil could create the sticky inflation environment that encourages demands for higher pay.

Anticipating calls for tighter policy within the ECB, money markets are betting that rates will rise later this year. The ECB's Isabel Schnabel said recently rising energy prices could force the bank to stop "looking through" high inflation and act to temper price growth.

What happens to oil prices when strong winter demand eases is now key. Coming months should also show if other inflationary elements such as power prices and supply bottlenecks abate. Finally, if costly oil starts hurting consumption and slows economic growth, energy demand tends to self-correct.

Massimiliano Castelli, head of strategy, Global Sovereign Markets at UBS Asset Management, expects oil to stay in a range of $60-$80 a barrel.

"If we see that inflation is consolidating, on levels that are higher than current official forecasts, then all central banks might be forced to embrace more conservative approaches, including the ECB," said Antonio Cavarero, head of investments at Generali (MI:GASI) Insurance Asset Management. "But this is still to be seen."

As inflation breaks records, $100 oil is also looming

Related Articles

Wall Street rallies on back of big tech, banks
Wall Street rallies on back of big tech, banks By Reuters - May 23, 2022

By Stephen Culp NEW YORK (Reuters) - U.S. stocks ended higher on Monday as gains from banks and a rebound in market-leading tech shares supported a broad-based rally following...

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at’s discretion.

Write your thoughts here
Are you sure you want to delete this chart?
Post also to:
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Our Apps
© 2007-2022 Fusion Media Limited. All Rights Reserved.
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
  • Sign up for FREE and get:
  • Real-Time Alerts
  • Advanced Portfolio Features
  • Personalized Charts
  • Fully-Synced App
Continue with Google
Sign up with Email